Protecting your Future: Tax-free gifting an easy way to pass on assets

With so much attention focused on the future of the estate tax rate and exemption levels, it is easy to forget about other tools to save on taxes while passing on assets.

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By Bonnie Kraham

recordonline.com

By Bonnie Kraham

Posted Dec. 27, 2012 at 2:00 AM

By Bonnie Kraham
Posted Dec. 27, 2012 at 2:00 AM

» Social News

With so much attention focused on the future of the estate tax rate and exemption levels, it is easy to forget about other tools to save on taxes while passing on assets.

Perhaps the most easily understood is the "annual gift tax exclusion." The exclusion is a very helpful way to transfer property tax-free, and it will remain in effect regardless of what Congress does for 2013.

The exclusion exists above and beyond the estate tax exemption. It allows each taxpayer to give up to $13,000 per year to anyone tax-free. Because the exemption applies to individuals, couples have two bites at the apple and are able to transfer $26,000 yearly to each individual they choose. The annual gift exclusion will jump to $14,000 on Jan. 1.

Considering the uncertainty of the federal estate tax next year, it may be helpful to use the annual gift exclusion now to transfer assets beyond the reach of taxes at death. This is especially true in states like New York with state estate tax exemption levels below the federal rate. In New York, even if one currently has an estate below the federal exemption level ($5.12 million per individual), their estate will incur a state tax so long as it is above the state exemption level ($1 million).

This annual gift exclusion is just one of several ways to pass on assets tax-free, regardless of what happens to the federal estate tax. For example, the annual gift exclusion does not apply to tuition and medical care paid for another person if the money is provided directly to the provider (instead of to the individual benefitting).

Gifts also can be made to a special fund known as a "529 education savings account." The account is used for education funds for others, such as children or grandchildren. However, unlike other gifts, the person who creates the account is able to withdraw the original gift amount if necessary without incurring a penalty. This means that the account truly offers little risk, because the gift can be made with applicable tax benefits while the funds can be "taken back" down the road if some situations arise and the money is needed.

However, if you ever apply for Medicaid to pay for nursing home costs, the money you have in the 529 account is considered an asset.

If you're also interested in protecting your assets from nursing home costs, it's important to know how gifting affects your eligibility for Medicaid to pay for long-term care costs. If you gave any gifts in the past five years, including the IRS allowed annual exclusion amounts, you still must report to Medicaid the total amount of the gifts, which then results in a penalty period during which you are not eligible for Medicaid. A better option may be to make those gifts through a Medicaid asset protection trust, or MAPT.

Bonnie Kraham is an attorney practicing elder law estate planning with Ettinger Law Firm, 75 Crystal Run Road, Town of Wallkill. She can be reached at 692-8700, ext. 119 or at bkraham@trustlaw.com. This column is intended to provide general information, not legal advice.